Faulty Towers, Inc., manufactures boom boxes (music systems with radio, cassette,and compact disc players) for several companies. The boom boxes differ significantlyin their complexity and their manufacturing batch sizes. The following costs wereincurred in 2011:a. Indirect manufacturing labor costs such as supervision that supports directmanufacturing labor, $1,450,000b. Procurement costs of placing purchase orders, receiving materials, and payingsuppliers related to the number of purchase orders placed, $850,000c. Cost of indirect materials, $275,000d. Costs incurred to set up machines each time a different product needs to bemanufactured, $630,000e. Designing processes, drawing process charts, making engineering process changesfor products, $775,000f. Machine-related overhead costs such as depreciation, maintenance, productionengineering, $1,500,000 (These resources relate to the activity of running themachines.)g. Plant management, plant rent, and plant insurance, $925,000Required:1. Classify each of the preceding costs as output unit-level, batch-level,product-sustaining, or facility-sustaining. Explain each answer.2. Consider two types of boom boxes made by Faulty Towers, Inc. Oneboom box is complex to make and is produced in many batches. The otherboom box is simple to make and is produced in few batches. Suppose thatFaulty Towers needs the same number of machine-hours to make eachtype of boom box and that Faulty Towers allocates all overhead costsusing machine-hours as the only allocation base. How, if at all, would theboom boxes be mis-costed? Briefly explain why.3. How is the cost hierarchy helpful to Faulty Towers in managing itsbusiness?
Faulty Towers, Inc., manufactures boom boxes (music systems with radio, cassette,
and compact disc players) for several companies. The boom boxes differ significantly
in their complexity and their manufacturing batch sizes. The following costs were
incurred in 2011:
a. Indirect
manufacturing labor, $1,450,000
b. Procurement costs of placing purchase orders, receiving materials, and paying
suppliers related to the number of purchase orders placed, $850,000
c. Cost of indirect materials, $275,000
d. Costs incurred to set up machines each time a different product needs to be
manufactured, $630,000
e. Designing processes, drawing process charts, making engineering process changes
for products, $775,000
f. Machine-related
engineering, $1,500,000 (These resources relate to the activity of running the
machines.)
g. Plant management, plant rent, and plant insurance, $925,000
Required:
1. Classify each of the preceding costs as output unit-level, batch-level,
product-sustaining, or facility-sustaining. Explain each answer.
2. Consider two types of boom boxes made by Faulty Towers, Inc. One
boom box is complex to make and is produced in many batches. The other
boom box is simple to make and is produced in few batches. Suppose that
Faulty Towers needs the same number of machine-hours to make each
type of boom box and that Faulty Towers allocates all overhead costs
using machine-hours as the only allocation base. How, if at all, would the
boom boxes be mis-costed? Briefly explain why.
3. How is the cost hierarchy helpful to Faulty Towers in managing its
business?
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